Fintech Africa: Made in China!

So imagine this scenario,

A room with 50 staff from the World Bank, 30 Masters students elect and 12 entrepreneurs seated in tables of six, where we get to discuss our macro views on entrepreneurship, technology, access to capital, regulation and our current challenges in the market. Interestingly, there was strong debate and each of our views had its own merit. Surprisingly, it was evident through intense debate that Bankers will always think like ‘Bankers’ where the views being tabled were very much focused on how things are done today or how they should be done, i.e. ‘like today’. It was of no surprise to me that the notion on how things like enabling entrepreneurship, use of technology to disrupt the market, limited access to capital or stringent regulations were looked at from our World Bankers. Thankfully, I am not speaking of the majority that attended, more so the few that I interacted with and their traditional views on banking.

Interestingly, I raised a point about the changing banking regulations in China and how the market was opening up to technology in the financial services space. I had shared examples of what was done to encourage change and the impact to date. Off course, the World Bank staff I had interacted with was oblivious to these changes and didn’t see the alignment to South Africa. I was a bit shocked during the conversation and kept thinking whether the bankers had understood the meaning of the letter ‘C’ in BRICS. Nonetheless, I had no intention of being rude to them and their 100 years of institutional knowledge, so it made sense to write about it.

South Africa: can we learn from China?

During 2011, South Africa joined BRICS, consisting of Brazil, Russia, India, China and amended the acronym by adding an S. South Africa had positioned itself, rhetorically at least, as a ‘gateway’ to Africa. South Africa’s role as a ‘gateway’ should also be questioned in the light of what this role entails, i.e. facilitating the economic engagement, whether positive or negative, of external actors with the African continent. This could be problematic in two senses: first, by presenting itself as a ‘gateway’ to Africa, South Africa potentially ushers in more intense competition over African resources, which may harm the interests of other African countries, and its own. Secondly, South Africa’s capabilities and resources in the areas of technology, bureaucracy and skills could seriously limit its ability to act as a ‘gateway’. This stance is further problematised in light of South Africa’s uncertainty over the conduct of its own private commercial interests on the continent.

South Africa may share similar interests with China by being closely aligned in the BRICS family however; we are incomparable from a Banking and Fintech perspective. According to the findings of the Disrupt Africa African Tech Startups Funding Report 2016, African tech startups raised funding in excess of $129M in 2016, with the number of startups securing funding up by 16.8 per cent compared to 2015. South Africa, Nigeria and Kenya were the top three destinations for tech investors in 2016, both in terms of number of deals and total amount of funding. In comparison, Fintech companies globally raised $12.7B deals in 2016 of which largely overshadows the paltry $129M attracted by innovators on our continent. Notably, Asia accounted for 43% of global funding in 2016 where China attracted $4.6B in investments (CB Insights 2016).

China: moving away from the traditional banking

How did Fintech get so big in China?

The short answer is that it was the right thing at the right time in the right place. China’s government shifted regulatory attitudes by initially giving Fintech companies a free hand, a striking contrast to its heavy policing of traditional banks. The hunch was that Fintech firms were small enough for any problems to be manageable, and might produce useful innovations. This wager paid off where the rise of mobile payments and online lending owe much to light regulation.

It is of no surprise that Chinese banks are struggling to adapt to liberalisation due to a wave of competition from internet finance companies that are changing the industry landscape. China’s existing banks have legacy systems and processes whereas companies emerging from the technology side have the advantages of agility and deep technical talent. They are quickly building the financial capabilities needed to compete head-to-head with traditional financial institutions. The Chinese government announced a pilot programme of banks owned entirely by private companies such as Alibaba and Tencent, as it steps up liberalisation of its financial sector. Tencent is one of the participants in WeBank, which will focus on lending to small firms and consumers. The official entry into the banking sector of online groups further blurs the boundary between internet companies and financial institutions.

A ranking of the world’s most innovative Fintech firms gave Chinese companies four of the top five slots last year. The largest Chinese Fintech company, Ant Financial, has been valued at about $60b, on a par with UBS, Switzerland’s biggest bank. The rise of Fintech in China is most notable in mobile payments. This change made them big, early adopters of digital payments where this shift was accelerated with the arrival of smartphones. Competition has sparked a stream of innovations; especially in the way mobile apps can connect online to face-to-face retail transactions. Many of the payment functions within WeChat or Alipay exist elsewhere in the world, but in disaggregated form: Stripe or PayPal for online shops processing payments; Apple Pay or Android Pay for those using their phones as wallets; Facebook Messenger or Venmo for friends transferring money. In China all these different functions have been combined onto single platforms. Adoption is widespread where around 425m Chinese, or 65% of all mobile users, phones act as wallets, the world’s highest penetration rate, according to China’s ministry of industry and information technology.

The other area of China’s Fintech prowess is investment. Until recently, Chinese savers faced two extreme options for managing their money, i.e. [1] stash it in bank accounts, where interest rates were artificially low, but it was as safe as the Communist Party; or [2] bet on the stock market, about as safe as playing baccarat in a casino in Macau. ‘In the middle there was nothing,’ says Huang Hao, vice-president of Ant Financial. Fintech has opened that middle ground to the Chinese market.

To be honest, I guess you are reading the content and saying that South Africa has a well-developed financial system whereas China’s banking system was undeveloped for a very long time hence the high growth in Chinese Fintech. One could also argue that South Africa has a wide array of payment related Apps and our internet penetration depth with subsequent internet banking is somewhat world class.

The limitation to thinking South Africa is void of such a need may be superfluous when one considers the following three argumentative points,

[1] If our financial system is so advanced, why is the cost of digital banking so high?

Hint: check out your monthly bank charges for a clue!

[2] If digital payments were so well entrenched in South Africa, why does cash reign supreme in the mass market?

Hint: check out the PASA report on cash disbursements at South African ATMs, if you can get a hold of it.

[3] If investment funds were designed for the South African population, why does two thirds of the country not use investment funds as a means of retirement planning?

Hint: go and visit a black township and you will know!

China’s Fintech champions are also trying to break into new territory abroad. WeChat’s mobile wallet is usable internationally, mostly in Asia for now. Ant Financial has invested in mobile-finance companies in India, South Korea and Thailand. Interestingly, replicating their successes in other markets will not be straightforward because much of their repertoire was devised specifically to address deficiencies in China’s financial system. We should also be cognisant that anything integrating into core banking abroad will require local incorporation and adherence to local regulations. For emerging markets, the lesson is that with the right technology, it is possible to leapfrog to new forms of banking. The biggest lesson of all, it is not upstarts versus incumbents but rather a question of how banks absorb the Fintech innovations blossoming around them. China, an early adopter of the abacus, is, after a long period of dormancy, once again blazing a trail in finance. When it comes to Fintech, the rest of the world will be studying China’s experience.

China: an Asian development model for Africa

Chinese economic dynamism could catalyse new growth to fundamentally transform the African economy. We must be cognisant that three decades ago, China was as poor as Malawi and the question China is asking Africa, is how can Africa emulate China? Without denying that many groups in China are losers or sufferers of grievous harm during the reform era, China’s rise is still real and globally transforming. The aspects of political freedom or political system preferences cannot be adequately discussed in this article however; Beijing has constantly promoted a going out policy of helping Chinese firms to become globally competitive where Africa is a testing ground (Kilissu 2007). It is the latter statement that is of interest, i.e. we should be interested in what China is doing with regards to financial services and Fintech. If South Africa truly is the ‘gateway’ to Africa, then we should be learning from these changes. In essence, South African entrepreneurs should be using South Africa as their sandbox environment to plug in and thereafter, scale up to compete on a more global level. This approach may drive more value into South African Fintech investments through two outcomes, [1] our entrepreneurs are not focused on the 25m people employed in South Africa because they are building a model for a global market and [2] testing our models in South Africa provides us entrepreneurs with an important learning curve before competing on a global scale. The elephant in this room of thought ultimately comes down to the regulator in South Africa and the flexibility that will be allowed to aspiring entrepreneurs in the Fintech space. At worst, all the regulator can do is say ‘NO’ and we move on, so that the South African banks can continue fighting for their market share amongst the labour force of 25m and we look at other avenues of exploring Fintech. More importantly, someone has got to ask the question at some point.

Notes to consider:

Traditional bankers dismiss Fintechs as ‘the Kodak’s of the 21st century’, another as ‘financial vacuum-tube makers in the age of the transistor’. Fintech innovators see banks as tomorrow’s telephone copper wires, vestiges of an earlier age, and believe that in essence banks cannot adapt.

‘How often have you seen an incumbent really reinvent themselves?’ a startup founder asks.

To be fair, banks have done fairly well with moving their services onto the internet and then mobile. These are two major transitions that have fundamentally changed the way people handle their financial affairs, few industries successfully manage even one. Given their size, banks are perhaps not as incapable of evolution as their Fintech critics make out. So it may not be surprising that Fintech has failed to break through in what most people would recognise as day-to-day banking. No startup has successfully made a play for the centre-piece of people’s financial lives, the ‘current account’. Banks are making a good enough job of this core service in a highly regulated environment.

The threat Fintechs pose is not that they will topple banks as linchpins of the economy. Most Fintechs are not interested in the complicated, regulated bits of banking. The threat they pose to incumbents is that they might just seize the profitable add-ons, from loans to payments services and investment advice, anything that generates fees. It now seems increasingly likely that they will manage to “unbundle” at least some of these extra services banks offer their clients. This approach will leave today’s lenders with fewer revenues to maintain their costly rump services.

The most credible part of Fintechs braggadocio is the comparison drawn between banks and telephone copper lines. The very mention of this analogy haunts the most hard core of bankers. In the same way that AT&T, BT and their peers have fought to avoid being turned into ‘dumb pipes’ delivering the vibrant internet’s content, unbundled banks may find themselves becoming ‘dumb stores of value’, funneling money to more glamorous Fintech products. Bankers are well aware of this view. They are keeping a close eye on how their products compare with those of the newcomers, and many of them understand their limitations when it comes to innovating.

If you want to come up with a new product in a bank, any one of 50 people internally can shoot it down. If you’re a startup, you can go visit 50 venture capitalists and you only need one of them to give it a green light,’ says Tonny Thierry Andersen, head of retail at Danske Bank.

The startup ethos is changing the way bankers think about their profession. One common refrain among incumbents is that they need to become less product-focused and more customer-focused, which is true but easier said than done. They also note that customers value transparency. The gulf in space that isolated banks from competition is being bridged. Banks still have a future, but they will have to work harder to make it a profitable one.

In closing, my experience with the World Bank attendees was slightly disappointing. Our market may not have the same challenges as China however, we can surely learn from them to open up possibilities for Fintech entrepreneurship. Off course, the option of allowing change ultimately comes down to our regulator but have you ever wondered, who is regulating our regulator?

Fintech Africa: Made in China!

Good or Bad, you can decide that point!

References:

Moore, C. (2012). Policy Brief BRICS partnership : A case of South- South Cooperation ? Exploring the roles of South Africa and Africa, (99).

CBInsights. (2017). The global fintech report: 2016 in review. Retrieved from https://www.cbinsights.com/research-fintech-2016-report

Kambayashi, S. (2015, May 9). Fintech has made inroads, but the incumbents still dominate day-to-day banking. Economist. Retrieved from http://www.economist.com/news/special-report/21650296-fintech-has-made-inroads-incumbents-still-dominate-day-day-banking-how

Kambayashi, S. (2017, February 25). Advanced technology, backward banks and soaring wealth make China a leader in Fintech. Economist. Retrieved from http://www.economist.com/news/finance-and-economics/21717393-advanced-technology-backward-banks-and-soaring-wealth-make-china-leader

Woetzel, J. Seong, J. (2014). China’s banks face disruption. McKinsey & Company. Retrieved from http://www.mckinsey.com/mgi/overview/in-the-news/chinas-banks-face-disruption

 

 

 

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